Macroeconomics
Costs of Infation People often reminisce about the days when a hamburger was just a quarter and a soda cost a mere dime, highlighting the impact of evolving prices over time. Nevertheless, it's important to note that inflation does not uniformly harm every aspect of the economy; it can, in fact, yield advantages for
specifc groups and sectors. Anticipated Infation
To be abletopredicttheeffectsofinflationondifferentgroups, we must understand the difference between anticipated and unanticipated inflation. Anticipated inflation is expected; therefore, the recorded or actual inflation rate (e.g., 5%) is closely aligned with the expected inflation rate (e.g., 5.1%). Thisallowsincomeearners toreducetheimpactofinflationwhenitoccurs.Let’sexplorethe effects of anticipated inflation:
● EffectonConsumerSpending: Sinceinflationis expected ,consumers increasetheirspending before it hits tobeneftfromthecurrentlowerprices.Bythetimepricesincrease,consumers willbe holdinglessmoney sincetheyspentitbeforeitlosesvalue.Consequently,peoplestart visiting banks more often to withdraw amounts of money to cover their spending. This cost incurred due to holding less money in times of inflation is referred to as shoe-leather cost . ● Effect on Firms: When inflation is expected,businessesraisetheirpricestomaintainthereal value of their revenues when inflation occurs. This forces them to change their price tags accordingly.Thecostsofreplacingmenusandpricetagsareknownas menucosts .However,if prices rise higher than costs, frms and producers will beneft since their revenues will increase. ● EffectonSavers: Interestistherewardforsavingandthecostofborrowing.Saverslosewhen the nominal interest rate they receive is lower than the anticipated inflation rate (nominal interest rate = real interest rate − inflation). This means that their real returns are negative, costing them purchasing power over time. ● Effect on Lenders and Borrowers: Lenders anticipate increases in nominal values, and therefore, charge higher interest rates to maintain the value of the money they loanedoutto borrowers. As a result, borrowers lose since they end up paying higher interest rates. ● Effect on Workers: When workers possess strong bargaining power, they can successfully negotiate for salary adjustments that enable them to keep pace with the rising cost ofliving. However,workersinlow-wagepositions,lackingsignifcantbargainingpower,mayfacehardship as their earnings will have reduced purchasing power due to inflation. ● Effect on Retirees: Retirees with fxed incomes will also lose purchasing power since prices have increased, whereas their incomes have not.
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